New Zealand Inflation requires more Tightening

Winiford

The last quarter saw the consumer prices in New Zealand grow at their fastest pace in almost 30 years, which indicates that the country’s central bank needs to stick to its hawkish course for keeping the price pressures in check. Otherwise, the entire economy could see a recession. However, after data showed that the inflation figures were not at hot as expected, there was a slight decline in the New Zealand dollar, as it softened expectations of a rate hike by the central bank in May of around 50 basis points. The first quarter saw annual inflation go up by 6.9%, which had been 5.9% in the previous quarter.

On Thursday, Statistics New Zealand issued a statement, which stated that this increase was the fastest seen in the last three decades, as the last time there had been a 7.6% increase in June 1990. The fourth quarter saw the CPI increase by 1.4%, but the quarter ending March reported an increase of 1.8% in same. Nonetheless, the data remained below analyst expectations, as a 2.0% increase had been predicted, along with an annual rise in consumer prices of 7.1%. Interest rates were also hiked up by the Reserve Bank of New Zealand (RBNZ) last Wednesday to 1.50%.

This is the fourth increase by the country’s central bank and was of around 50 basis points. The bank has indicated that they would have to increase rates further, if they want to stay ahead of the inflation. The inflationary pressures in the country remained broad based, as there was an increase in domestic price pressure. Data from Statistics New Zealand showed that prices for housing, petrol, construction and food had gone up. Bank economists said that the problem with domestic inflation is that it does not ease up quickly. This continued increase in inflation domestically indicates that the RNBZ would have to hike up interest rates.

Of course, a higher interest rate would be a problem for indebted households, particularly as the housing market continues to soften. There was a 0.4% decline in the Kiwi dollar, as it reached $0.6772. There was a decline in two-year swap rates, as they reached 3.52%. Since global inflation is expected to remain high for a while, it is likely that the RNBZ will increase interest rates. Moreover, prices of goods and commodities that are affected by supply disruptions will also continue to be high. The second quarter is expected to have inflation of about 7%.